25th November 2018

The wait goes on

MARKET CLOSE:
iTraxx Main

80.6bp, +0.9bp

iTraxx X-Over

333.7bp, +4bp

🇩🇪 10 Yr Bund

0.34%, -3bp

iBoxx Corp IG

B+162.5bp, unchanged 

iBoxx Corp HY

B+483.5bp, +4bp

🇺🇸 10 Yr US T-Bond

3.05%, -1bp

🇬🇧 FTSE 100 6049.62, (-1.73%) 🇩🇪 DAX 12489.46, (-0.04%) 🇺🇸 S&P 500 3152.05, (-0.65%)

It’s now or never…

We’re through Thanksgiving & Black Friday, and into the final couple of weeks of where we might get some meaningful business done. It’s been a poor year in almost every aspect for risk markets and we don’t expect much of a recovery before we close it out. It likely will not look much better than it does at the moment.

There is just too much event risk in the air, meaning that any semblance of price recovery might be taken as a selling opportunity. We could see some decent primary activity judging by the number of mandates being dished out and postponed deals which might revisit should conditions improve and windows open. But we’ve probably seen the best of it.

Last Friday was a good case in point, highlighting the downside risks in macro following a series of Eurozone data suggesting that the current slump is looking like just the beginning of a prolonged period of lower/slowing growth. There is a raft of data emerging now which suggests this to be the case, and we still have crucial UK Brexit vote to come.

The EU might have voted to accept the deal but a ‘No’ vote in Parliament in a couple of weeks time will help contribute tipping the region into recession. Draghi will need to take note – this is no temporary soft patch, as he suggested previously that it might be. That QE ends in several weeks while the next ECB meeting (Dec 13) may well prove to be a pivotal moment.

We knew that the German economy contracted in Q3 from previously released data, and we now know that a slump in exports was responsible. Furthermore, Eurozone manufacturing PMI data suggested weakness across the region. The euro took a hit on the data flow. Oil prices fell some more, now trading off a $59 per barrel handle for Brent, against an October 4-year high in excess of $86 per barrel. Inflation expectations are falling hard.

As was expected, very little happened during the final couple of sessions of last week. The EU gathering over the weekend and a periled Theresa May was always enough to keep the markets on tenterhooks. The ongoing demands from the EU, leaked or otherwise, are enough to rile Brexit leavers and remainers alike, such that the odds are stacked hugely in favour of the vote failing to pass when it comes to parliament in December.

Equities were trading in tight ranges but mostly in the red through the final Black Friday session, rates were better bid with 10-year Bund yields back to summer levels 0.34%) while credit, which managed to stem the tide of weakness which had beset the asset class in the previous week on Thursday, was back to being better offered for choice. There was no primary to talk of which mattered (73% state-owned La Poste was Friday’s only borrower, €500m 10-year).


Primary winds down for the year

We are probably not going to see too much business in primary transacted between now and year-end. At best, it’s likely that there are just a couple of weeks left in which to get deals away. Unfortunately, there is enough event risk brewing that will mean borrowers are going to have to be nimble in their execution timing, as well as reasonable in their pricing targets. For many, there is going to be an element of price discovery given that the market has been so hit and miss of late against a deteriorating backdrop for risk markets.

The year to date IG non-financial supply level comes in at €210bn and we would think that €220bn – €225bn will be most we could expect come year end. Some €20.9bn has been issued this month – but amazingly, we didn’t see a single IG non-financial (non-government owned) corporate in the market last week! Takeda’s €7.5bn six-tranche offering on Nov 15 was the last such transaction. It’s not been terribly exciting.

In the high yield sector, we’ve had nothing since IDG’s dual tranche €720m offering on Nov 9, with just €1.5bn issued this month and €62bn for the year so far, making this year the second best in history for issuance in HY. There is a decent pipeline and we dare say that deals will get away, but we’re probably looking in the context of no more than €5bn over the next 2-3 weeks, dependent of course on the broader markets conditions.

It’s not much better in senior financials where the €6bn issued this month has all come from ING Group entities (HoldCo/OpCO entities). We’re up at €121bn for the year so far and need another (unlikely) €14bn to get issued before year-end to prevent the annual total being the lowest since the euro-era began.


End of year can’t come quickly enough

It was a quite laborious end to the week. US equities ended up to 0.7% lower although the focus was on Trump putting pressure on the Saudis to keep pumping oil and maintaining a lower price. The news flow was focused on the Eurozone data and the Brexit situation.

In duration, we closed with Gilts in the 10-year benchmark yielding 1.38% (-5bp), which was 3.41% for BTPs (-1bp) and that was even after Moody’s warned about the sustainability of the debt load, the pressure on the banking system and ultimately the sovereign’s credit rating. For US Treasuries were yielding 3.05% (-1bp).

In credit, we closed the session with IG unchanged, leaving the iBoxx IG cash index at B+162.5bp with high yield a tad better offered and the index wider at B+483.5bp (+4bp). Small moves, little really going on. For the synthetic indices, iTraxx Main moved 0.9bp higher to close the week at 80.6bp and X-Over edged 4bp higher at 333.7bp. Basically, all and sundry were sidelined and this will remain the case. Unless something pops up in primary, our market is pretty much closed for the year.

As for this week, Trump and Xi meet at the G-20 and that will provide for some headline risk, no doubt. There’s a bunch of US data due (Fed minutes, Q3 GDP, PCE) which will likely have only a moderate bearing on market direction, but the ongoing Brexit situation just might!

Have a good day.


For the latest on corporate bonds from financial news sources, click here.

Suki Mann

A 30+ year veteran of the European corporate bond markets and in his role as Credit Strategist, Dr Mann has been ranked number one in the Euromoney Investor Survey eight times in ten years. Previously with Societe Generale and UBS, he now shares views of events in the corporate bond market exclusively here on CreditMarketDaily.com.